Dunning’s Eclectic Paradigm Essay

Dunnings Eclectic Paradigm Professor John Dunning proposed the discriminating paradigm as a frame hold out for determining the extent and pattern of the value-chain operations that companies own abroad. Dunning draws from various theoretical perspectives, including the comparative advantage and the factor proportions, noncompetitive advantage, and internalization advantage theories. Lets use a real firm to illustrate the eclectic paradigm. The Aluminum Corporation of America (Alcoa) has oer 130,000 employees in roughly 43 countries. The companys integrated operations include bauxite mining and aluminium refining. Its products include primary aluminum (which it refines from bauxite), automotive components, and sheet aluminum for beverage cans and Reynolds Wrap. The eclectic paradigm specifies three conditions that determine whether or not a company will inter subjectize via FDI ownership-specific advantages, location-specific advantages, and internalization advantages.To successful ly come out and conduct business in a orthogonal market, the MNE must possess ownership-specific advantages (unique to the firm) relative to other firms already doing business in the market. These consist of the knowledge, skills, capabilities, processes, relationships, or material assets held by the firm that allow it to compete effectively in the global marketplace. They amount to the firms competitive advantages. To ensure international success, the advantages must be substantial enough to offset the costs that the firm incurs in establishing and operating foreign operations. They likewise must be specific to the MNE that possesses them and not readily movable to other firms.Examples of ownership-specific advantages include proprietary technology, managerial skills, trademarks or brand names, economies of scale, and access to substantial financial resources. The more valuable the firms ownership-specific advantages, the more probably it is to inter- nationalize via FDI. On e of Alcoas most important ownership- specific advantages is the proprietary technology that it has acquired from R&D activities. Over time, Alcoa has also acquired special managerial and merchandising skills in the production and marketing of refined aluminum. The firm has a well-known brand name in the aluminum industry, which helps increase sales. Because it is a large firm, Alcoa also profits from economies of scale and the human race power to finance expensive projects. These advantages have allowed Alcoa tomaximize the performance of its international operations. Location-specific advantages refer to the comparative advantages that exist in individual foreign countries.Each country possesses a unique set of advantages from which companies can derive specific benefits. Examples include natural resources, skilled labor, low-cost labor, and inexpensive capital. Sophisticated managers see and seek to benefit from the host country advantages. Aloca- tion-specific advantage must be present for FDI to succeed. It must be profitable to the firm to locate abroad, that is, to utilize its ownership-specific advantages in conjunction with at least some location-specific advantages in the target country. Otherwise, the firm would use exporting to enter foreign markets.17 In terms of location-specific advantages, Alcoa located refineries in Brazil because of that countrys huge deposits of bauxite, a mineral found in relatively few other locations worldwide. The Amazon and other major rivers in Brazil generate huge amounts of hydroelectric power, a critical ingredient in electricity-intensive aluminum refining.Alcoa also benefits in Brazil from low-cost, relatively well-educated laborers, who work in the firms refineries. Internalization advantages are the advantages that the firm derives from internalizing foreign-based manufacturing, distribution, or other stages in its value chain. When profitable, the firm will transfer its ownership-specific advantages across n ational borders within its own organization, rather than dissipating them to independent, foreign entities. The FDI decision depends on which is the best optioninternalization versus utilizing external partnerswhether they are licensees, distributors, or suppliers. Internalization advantages include the ability to control how the firms products are produced or marketed, the ability to control dissemination of the firms proprietary knowledge, and the ability to reduce buyer perplexity about the value of products the firm offers.18 Alcoa has internalized many of its operations instead of having them handled by outside independent suppliers for five reasons. First, Alcoa management wants to minify dissemination of knowledge about its aluminum refining operations knowledge the firm acquired at great expense. Second, compared to using outside suppliers, internalization provides the best net return to Alcoa, allowing it to minimize the costs of operations. Third, Alcoa needs to control sales of its aluminum products to avoid depressing world aluminumprices by supplying too much aluminum into world markets. Fourth, Alcoa wants to be able to apply a differential pricing strategy, charging different prices to different customers. The firm could not differentiate its prices very effectively without the control over the distribution of its final products that internalization provides. Finally, aluminum refining is a complex business and Alcoa wants to control it to maintain the quality of its products.